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This paper investigates the effectiveness of the ‘quantitative easing’ policy, as implemented by the Bank of England in March 2009. Similar policies had been previously implemented in Japan, the U.S. and the Eurozone. The effectiveness is measured by the impact of Bank of England policies (including, but not limited to QE) on nominal GDP growth – the declared goal of the policy, according to the Bank of England. Unlike the majority of the literature on the topic, the general-to-specific econometric modeling methodology (a.k.a. the ‘Hendry’ or ‘LSE’ methodology) is employed for this purpose. The empirical analysis indicates that QE as defined and announced in March 2009 had no apparent effect on the UK economy. Meanwhile, it is found that a policy of ‘quantitative easing’ defined in the original sense of the term (Werner, 1994) is supported by empirical evidence: a stable relationship between a lending aggregate (disaggregated M4 lending, i.e. bank credit for GDP transactions) and nominal GDP is found. The findings imply that BoE policy should more directly target the growth of bank credit for GDP-transactions.

Central banks have recently introduced new policy initiatives, including a policy called ‘Quantitative Easing’ (QE). Since it has been argued by the Bank of England that “Standard economic models are of limited use in these unusual circumstances, and the empirical evidence is extremely limited” (Bank of England, 2009b), we have taken an entirely empirical approach and have focused on the QE-experience, on which substantial data is available, namely that of Japan (2001-2006). Recent literature on the effectiveness of QE has neglected any reference to final policy goals. In this paper, we adopt the view that ultimately effectiveness will be measured by whether it will be able to “boost spending” (Bank of England, 2009b) and “will ultimately be judged by their impact on the wider macroeconomy” (Bank of England, 2010). In line with a widely held view among leading macroeconomists from various persuasions, while attempting to stay agnostic and open-minded on the distribution of demand changes between real output and inflation, we have thus identified nominal GDP growth as the key final policy goal of monetary policy. The empirical research finds that the policy conducted by the Bank of Japan between 2001 and 2006 makes little empirical difference while an alternative policy targeting credit creation (the original definition of QE) would likely have been more successful.

In 2008, governments in many countries embarked on large fiscal expenditure programmes, with the intention to support the economy and prevent a more serious recession. In this study, the overall impact of a substantial increase in fiscal expenditure is considered by providing a novel analysis of the most relevant recent experience in similar circumstances, namely that of Japan in the 1990s. Then a weak economy with risk-averse banks seemed to require some of the largest peacetime fiscal stimulation programmes on record, albeit with disappointing results. The explanations provided by the literature and their unsatisfactory empirical record are reviewed. An alternative explanation, derived from early Keynesian models on the ineffectiveness of fiscal policy is presented in the form of a modified Fisher-equation, which incorporates the recent findings in the credit view literature. The model postulates complete quantity crowding out. It is subjected to empirical tests, which were supportive. Thus evidence is found that fiscal policy, if not supported by suitable monetary policy, is likely to crowd out private sector demand, even in an environment of falling or near-zero interest rates. As a policy conclusion it is pointed out that by changing the funding strategy, complete crowding out can be avoided and a positive net effect produced. The proposed framework creates common ground between proponents of Keynesian views (as held, among others, by Blinder and Solow), monetarist views (as held in particular by Milton Friedman) and those of leading contemporary macroeconomists (such as Mankiw).